USDtb Review
LlamaRisk supports the incorporation of USDtb as a USDe backing asset and eligible asset for the Reserve Fund. Our position on including USDtb as backing assets hinges on the performance of the underlying asset, i.e. BUIDL, and the legal architecture of USDtb. This analysis draws upon information provided in the Tokenization Grand Prix Application.
See analysis details here:
Legal Structure
Legal Structure
The backing assets for USDtb are to be held by Pallas Fund (BVI) Ltd., a private investment fund operating under the regulatory oversight of the British Virgin Islands Financial Services Commission (BVI FSC).
Source: BVI FSC | Date: 29.11.2024
Under its regulatory authorization, Pallas Fund (BVI) Ltd. is permitted to operate within specific constraints, including a maximum of 50 investors, solicitation of subscriptions or purchases of fund interests on a private basis only, and issuance of fund interests exclusively to professional investors, each of whom must meet a minimum initial investment threshold of $100,000.
The Fund is structured with a sole subscriber, the token issuer, who acts as the client-facing entity and is also based in the BVI.
Custodial responsibilities for these assets will be entrusted to highly reputable third-party providers: Copper, Komainu, Coinbase, and Zodia. These custodians operate under robust regulatory regimes and hold licenses to conduct business across multiple jurisdictions.
Komainu is regulated by the Jersey Financial Services Commission (JFSC), the Dubai Virtual Assets Regulatory Authority (VARA), and holds an MLR registration with the UK Financial Conduct Authority (FCA) and an OAM registration in Italy.
Source: Zodia Custody | Date: 29.11.2024
Copper maintains Swiss regulatory approval and TCSP license in Hong Kong.
Coinbase - European Licenses, US and International
The scope of their custodial functions is a pivotal consideration. Key questions include whether custodians possess unilateral authority to execute transactions involving safeguarded assets, whether they control essential recovery keys, or whether their role is limited to co-signing transactions while Pallas Fund (BVI) Ltd. retains primary control over transactional keys.
Given that Coinbase and Copper currently serve as custodians for USDe backing assets, a prudent risk mitigation strategy would involve diversifying the allocation of BUIDL and USDC among the four presented custodians. Such an approach aims to reduce asset concentration within a single entity and diminish the risk associated with a single point of failure.
Athene Management Ltd. acts as the investment manager for the fund holding the backing assets. This managerial role triggers licensing requirements under the Approved Managers Regulations in the BVI, which are evidently satisfied by the entity.
Source: BVI FSC | Date: 02.12.2024
Our review of the structural diagrams and explainers did not reveal any material concerns regarding the bankruptcy remoteness of the assets. The closest link involves Ethena Labs, which serves as a service provider to the issuer and has one of its core contributors appointed as a director of the investment manager. However, these arrangements do not inherently compromise the segregation of USDtb reserves or the issuer’s independent operational control.
Reserves and Operational Structure
Reserves and Operational Structure
Reserves Structure
The reserve structure is expected to consist predominantly of BUIDL tokens, making up approximately 90% of the total, with the remaining 10% allocated to stablecoins. The stablecoin portion is specifically designed to facilitate redemptions over weekends when traditional markets are closed, and the Securitize platform or instant BUIDL redemption options are unavailable.
Significant changes to this allocation are not anticipated due to the robust and reliable redemption framework proposed by the token issuer.
Minting & Redemption
The minting and redemption processes are designed to adhere to the regulatory requirements of the BVI. Only whitelisted users may access these functions, with each transaction contingent upon the user’s acceptance of an exact quote for the minting or redemption amount. AML and sanctions compliance checks are implemented to prevent prohibited persons from gaining access to the product.
Users can mint USDtb using USDC, while redemptions may be processed in either USDC or BUIDL, provided the user satisfies whitelisting conditions with Securitize. The issuer has committed to a 24/7 minting and redemption service.
Nonetheless, the composition of the backing assets necessitates careful consideration of redemption timelines. With 90% of reserves held in BUIDL, the immediate availability of liquidity is constrained, leaving 10% of reserves in USDC for guaranteed instant redemptions. Consequently, redemptions relying on BUIDL may require processing times of T+0 to T+1, depending on market availability and Securitize’s operational capacity. The on-chain USDC liquidity venue could be leveraged to expedite direct redemptions.
As a practical outcome, the reliable redemption period for USDtb is expected to range between instant and T+2. To ensure clarity and manage user expectations, we recommend explicitly communicating these timelines in the product’s Terms of Service and related subscription documentation.
Dependencies on BUIDL Fund
The major allocation of USDtb to the BUIDL fund prompts to cover all underlying risk assumptions for the BUIDL token itself. While 10% of the total USDtb supply would be instantly redeemable, the other part is subject to partial constraints of the BUIDL Fund.
BUIDL offers a stable redemption value of $1 per token and pays daily accrued dividends directly to investors’ wallets as new tokens each month. The Fund invests 100% of its total assets in cash, U.S. Treasury bills, and repurchase agreements. The exact distribution of backing assets is not disclosed. Fund participants also have flexible custody options allowing them to choose how to hold their tokens.
As described in the above section, the processing of redemptions for BUIDL depends on the availability of the capital in a designated BUIDL Direct Redemption Fund which is facilitated by Circle. It allows holders of BUIDL to transfer their shares to Circle for USDC using this designated on-chain contract allowing instant redemptions whenever USDC amount in the Redemption Fund is sufficient. Otherwise, redemptions relying on BUIDL Fund itself have processing times of T+0 to T+1, depending on market availability and Securitize’s operational capacity.
The on-chain USDC Redemption Fund shows consistent liquidity availability (~$90M) over time, with dips likely representing redemptions or rebalancing activities. This stability ensures redemption reliability.
Source: LlamaRisk’s Ethena Risk Dashboard, 4th December, 2024
Ethena has already allocated BUIDL as a safeguard asset in the reserve fund allocation and, therefore is already familiar with the mint & redemption process. For this purpose, Ethena’s reserve fund multi-sig was approved as a whitelisted minter of BUIDL. Currently, this RWA token constitutes ~40% of the reserve fund capital.
Source: LlamaRisk’s Ethena Risk Dashboard, 4th December, 2024
Given the underlying reliance on BUIDL, incorporating USDtb into the reserve fund’s capital would not alter the fund’s risk profile. Therefore, USDtb can be deemed as a suitable addition to the reserve fund. However, it is expected that the reserve fund maintains diversification, with the combined allocation of USDtb and BUIDL not exceeding 50% of the fund’s total capital.
BUIDL Performance
BUIDL’s market capitalization has stabilized at around $533M, with Ethereum hosting the majority of the activity. Minor contributions come from Polygon, Avalanche, and other chains. Gradual increases from May 2024 indicate steady adoption, though growth plateaued by late 2024.
Source: RWA.xyz, 2nd December, 2024
The BUIDL Fund’s yield performance has been in line with other RWA tokenized funds and close to the short-term US Treasury T-Bill yields. It is expected that yields remain closely correlated due to the underlying RWA composition of the Fund.
Source: LlamaRisk’s Ethena Risk Dashboard, 4th December, 2024
Currently, there are 24 whitelisted holders on the Ethereum network. In total, 30 different whitelisted holders have been identified across all chains where BUIDL is available.
Conclusion
The inclusion of USDtb as a backing asset appears structurally sound, given the regulatory rigor surrounding its legal and operational framework. The reliance on BUIDL for 90% of reserves introduces potential liquidity constraints during high redemption periods, mitigated to a reliable degree by the 10% allocation to USDC and the operational robustness of the minting and redemption processes. Redemption timelines (approx. T+0 to T+2) are reasonable but must be clearly communicated to users to set appropriate expectations.
Distributing assets across multiple custodians is advisable in order to minimize the potential impact of any one custodian’s operational or financial difficulties.
Our recommendation is to adopt a conservative approach, materialized through a low-tier initial allocation of USDtb within the backing composition. This allocation strategy would allow for careful observation of USDtb performance during the bootstrap phase, which we project to last at least 3 months. During this phase, proportions similar to those applied for SOL could be considered for gradual implementation, aligning with Ethena’s liquidity needs and market conditions. Since Ethena is expected to be the majority holder of USDtb, it would need to constantly monitor scheduled unstaking events, and potentially schedule underlying BUIDL redeem events.
